Should I invest in Real Estate or Stocks?

Deciding whether to invest in Real Estate or Stocks is a question I have chewed on personally and advised others on. Both are risky investments whereby both the income and capital return can fluctuate and is not guaranteed. Both asset classes offer a range of risk/return options, for example a new real estate development is riskier than an established commercial/residential property which already has a tenant in place. Similarly a share in a newly IPO’ed technology stock which is not yet profitable is riskier than that of an established technology company. 

However there are some big differences also. Here are some key factors to consider:

• Current asset allocation - Aim to have a diversified portfolio, so if you already have a large stock portfolio, investing in Real Estate could provide some good diversification benefits.
• What are you income objectives? If you need cash flow coming in each month, Real Estate could be a good bet due to the regular rental income. 
• What are your liquidity needs? If you foresee needing the cash in the near term, stocks may be a better best as it takes longer to find a buyer for real estate and the costs of selling (brokers etc) are higher.
• What is your desired involvement level? Owning real estate requires active involvement even if you have a property manager. If you have neither the time nor desire to spend time on this, stocks may be a better option
• Are you willing or able to put more money into the investment? If you own real estate you will need an additional fund for expended maintenance and capital spend. If you are not able to set aside a reasonable amount for this, stocks may be preferable. 
• What is your appetite to take on leverage - Mortgage loans are readily available for purchasing Real Estate and this leverage will allow you to amplify the gains you make compared to buying stocks unlevered. However the leverage does increase your risk also, for example if your mortgage rate is variable and interest rates rise, you will have to put a higher amount each month towards your mortgage.  

Finally, if you are still undecided between the two, you could opt for a hybrid like a stock in a listed REIT. These are liquid and easily traded and still provide exposure to real estate and an income flow, without the need for active involvement. However regulation and overhead costs can be high.